Bonus FeaturesUnderstanding Penny Stocks by Peter Leeds

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Halts and Delistings

Penny Stock Listing Status

To maintain exchange-listed status, penny stocks or even blue chip stocks must meet certain minimum standards. Failure to do so can result in delisting, meaning shares are no longer traded on that exchange. Delisted stocks can still trade on alternative markets (OTC, pink sheets), but these markets enforce less-stringent standards, creating a riskier environment for investors.

(Learn more about the various penny stock markets in the section entitled Where Do Penny Stocks Trade?)

A stock trades on an exchange only after the company has met that exchange's listing requirements, which are set by its board of governors. Requirements vary, but generally include net-worth minimums, number of shareholders, pre-tax income or revenues, and rules regarding corporate governance and public disclosure of financial statements. In addition, companies pay tens of thousands of dollars a year in tiered annual fees in order to be listed. You may be able to see how it could be difficult for penny stocks to get listed, and to maintain that listing over time.

The listing process was established to help create fair markets and protect investors from fraud and stock manipulation. (Penny stocks happen to be the most vulnerable to fraud and manipulation, because they are thinly traded and easy to move in price). The National Association of Securities Dealers (NASD) was created by the Securities and Exchange Commission to ensure fair trading practices.

Exchange listing assures investors that a company has met certain financial criteria. It is also a frequent prerequisite for a company to sell its shares to such institutional investors as pension funds and endowments. Association with an exchange can attract the attention of research analysts and lend prestige to a company, whether penny stocks or large caps.

Delisting and Penny Stocks

For a variety of reasons, companies may fall off/get booted from an exchange. Generally this occurs due to lack of compliance with the rules, mergers, acquisitions, bankruptcies or even something criminal such as fraud. Delisting is rare in any circumstance, but is more common among penny stocks, because they are smaller, less solid companies.

On the NYSE and AMEX, delistings occur relatively rarely.

Estimates from the AMEX show that the exchange losses 40 stocks a year, most of these being penny stocks.

Recent regulatory reforms have pushed delistings on the NASDAQ to record levels. According to the NASD, about 2,000 stocks have fallen off the NASDAQ since 1997, when the NASD adopted tighter financial requirements and a $1 minimum bid. Most of those delisted companies were penny stocks (no other exchange requires a minimum stock price). Of the delisted penny stocks, the majority immediately started trading on the Over the Counter Bulletin Board (OTC-BB), which is a subsidiary of the Nasdaq, and has lower listing requirements and regulations.

The new standards were adopted in response to growing concerns from the SEC about full and adequate disclosure of company information, fraud and stock-price manipulation.

NASDAQ officials say the $1 minimum bid is one of the most common reasons for delisting, thus it was the penny stocks who took the brunt of the delistings. If a company's share price falls below $1 for 30 consecutive trading days, it may be delisted. Most stocks delisted from the NASDAQ National Market resume trading on the NASDAQ SmallCap Market. Most penny stocks booted off the Nasdaq SmallCap Market trade then on the OTC-BB.

Once a company is notified by an exchange that it is at risk of delisting, it may request a hearing to allow it time to return to good standing.

Alternative Markets for Penny Stocks

Companies delisted from the major exchanges may end up trading on one of two over-the-counter markets:

The OTC Bulletin Board: The OTC-BB, which is also run by the Nasdaq, is relatively non-liquid compared to the three major exchanges. For example, recently about half of the market's roughly 6,500 issues were penny stocks traded at less than 50 cents a share, and fewer than half traded in that month, according to the OTC-BB.

Historically, companies trading on the OTCBB were not required to file regular financial statements with regulators. This removed a cumbersome ritual for small, closely held public companies that didn't care if their shares were actively traded. However, the Nasdaq adopted rules requiring filing for all companies trading in this market.

Pink Sheets: Many companies that fall off the OTCBB are likely to land on the Pink Sheets. The National Quotation Bureau, a private company in New York, runs this market. Each day, information on some 3,000 stocks (mostly penny stocks) is printed on sheets of pink paper and sent to paid subscribers (mostly brokerage houses).

Since the Pink Sheets don't require any financial reporting, it is generally considered the last stop for companies that have nowhere else to trade their securities.